Why holding through earnings is gambling: $IRBT


Too many stocks climb into earnings release and then collapse. Some climb after release but who can predict the winners in advance? IRBT s a good example. While I can see a few technical reasons in the chart that provided to me some warning signals to get exit my position (like the bounce off of the upper Bollinger Band), the best advance signal was the next earnings date (now 4/25/2017), which  always appears at the top of my charts–thank you TC2000! One way to protect one’s position  into earnings other than by selling out is to purchase short term put options (as insurance) on the stock.




Warning: India stocks; QQQQ short term up-trend in jeopardy; IBD50 list performance


I noticed over the weekend the incredibly weak price trend of just about all stocks and ETF’s   that are related to India.   I learned a long time ago that when the U.S. Federal Reserve raises interest rates to combat inflation, it eventually leads to a   market decline.   When the Fed thinks that the economy is growing too fast and likely to produce inflation, it applies the brakes by raising short term interest rates.   Higher interest rates mean   higher costs for businesses and consumers who borrow money, and the economy slows.   Because fine tooling the economy is an inexact science, the Fed usually errs by applying the brakes too hard, bringing on a larger slow down than intended, and often a recession.   Thus, a series of rate hikes usually kills a market up-trend.   The very smart stock analyst, Martin Zweig, many years ago published a careful empirical analysis of the impact of the Fed’s actions on the U.S. stock markets.   Of course, in the United States the Fed is still stimulating the economy by buying securities and printing money.

However, a series of interest rate hikes is   currently occurring   in India. I found this article after the weakness in India stocks prompted me to search for any explanation. I first wrote   about the India auto manufacturer,   TTM, last August, when it closed at $22.49, an all-time high. TTM subsequently peaked at $37.65 near the end of November and began a sustained down-trend, closing Friday at $24.71. Note on this daily chart (click on to enlarge) when TTM closed below its 30 day average (red line), which was a perfect sell signal. With the 30 day average now heading down, this stock is in a sustained short term down-trend, according to my definition. (It all looks so simple with 20:20 hindsight! Actually, it is if we just ignore the media noise and concentrate on the stock’s price trend.) This India automaker, was, perhaps, reflecting the impact of higher interest rates on consumer demand for cars. (But the putative rationale for the decline is not as important to me as the price action. The bad news usually comes out long after a stock has peaked.)   I could short TTM, but I prefer buying put options this week on an India ETF or bank.   The following India related stocks have closed below their 30 week averages and look ominous to me: INDY, PIN, EPI, IIF, IFN,INP,HDB, INXX.

By the way, I do not want to alarm you, but while the trend of India stocks looks the worst, it has plenty of company in the stocks/indexes of other countries, including China (CAF, CHIQ), Brazil (BRF), Turkey (TUR), Chile (CH), and Thailand (TTF). And I guess we should not omit Egypt (EGPT)…………

But the technicals for the U.S. markets look   a lot stronger— for now. The GMI is   5 (of 6) and the more sensitive GMI-R is 7 (of 10).   The GMI-R contains more   short term indicators and can signal a change in trend earlier than the GMI. Both the short and longer term up-trends are intact, although the QQQQ is sitting right on critical short term support.   A couple of down days this week could end the QQQQ short term up-trend, which completed its 48th day on Friday. The SPY and QQQQ completed their 21st week above their 10 week averages. When the QQQQ is above its 10 week average I am most likely to make money buying tech and growth stocks.   A close of QQQQ below its current 10 week average (54.70) would signal to me to exit the long side of the tech market.   The Worden T2108 indicator is in neutral territory, at 54%. A sign of short term weakness is the fact that only 32% of the Nasdaq 100 stocks closed with their MACD above its signal line……

So where do I stand with my accounts?   My university pension remains 100% invested in mutual funds.   I only exit them when my longer term indicators are very weak. However, my trading IRA and margin accounts are mainly in cash or a little on the short side. Fortunately I exited most of my long positions over a week ago when I became worried about the impending municipal bond crisis. While the pundits blame Friday’s market decline on the crisis in Egypt, those who have been following this blog understand that there are a lot of other reasons to expect market weakness. The very low percentage of advisers who are bearish (19.1%), the sudden selling   in   previously strong stocks (FFIV, CAVM, PANL, CREE, CTXS, APKT, AMZN)   and the failure of AAPL and GOOG to go to new highs after their great earnings were released are especially troubling signs to me. With the end of 4th quarter earnings announcements, there may not be a whole lot to inspire stocks to advance over the next few weeks….

You may recall that IBD announced at the end of December that they were abandoning the IBD100 list published every Monday for the IBD50 list. During QQQQ up-trends I typically selected my buys from the IBD100 list. In past posts I have shown that the types of high growth momentum stocks that meet the criteria for inclusion on the IBD100 list typically outperformed Nasdaq100 stocks in an up-trending market but underperformed them during a falling market.   This is because   stocks that climb rapidly usually are abandoned quickly by traders when the market turns down.   I analyzed the performance of the IBD50 list published on January 10, 2011, using the prior Friday’s close (1/7) as the starting point and going through Friday, 1/28.   I found that during this period, 32% of the IBD50 stocks rose; 12% rose 5% or more, and 1% rose 10% or more (TSCO, +7.6% and NFLX, +21.6%).   In addition, 10% declined more than 10%, with FFIV falling the most (-20.8%).   The first stock listed in this   IBD50 list, RVBD, declined -7.4%. In comparison, during the same period, 42% of the Nasdaq100 index stock advanced, 17% rose 5% or more, and 7% rose 10% or more. 4% declined -10% or more, including FFIV.   The IBD50 list is designed to use more stringent criteria than the IBD100 list did.   At least for this limited case and time period during which the Nasdaq100 index declined (-.25%), the IBD50 list   apparently underperformed the Nasdaq100 stocks. I will replicate this analysis in the future with subsequent IBD50 lists.

Great Washington Worden Seminar; Market in short term down-trend; Mainly in cash


On Saturday,   I had the opportunity to present for 2.5 hours at the Worden software work-shop.   I showed the audience how I use TC2007 to manage my trading. It was gratifying to see the warm reception I received from a   local, primarily older adult group.   I just finished two courses at the university and have been accustomed to lecturing to college students.   It was a new experience for me to present to a class of people who were their parents’ ages.   A big surprise was that my star student from three years ago surprised me by attending the work shop and told me that when he graduates in a few weeks, he will move to California to open up his own mutual fund.   The year after he completed my course, he made a lot of money buying put options (betting on a decline)   on USO during its dramatic decline in 2008, from over $100 to around $22. So the afternoon presentation was an exciting time and most of the 120 attendees said they would take my course on the market if it were ever offered more widely………

The market action last week spooked a lot of people.   My account actually rose on bizarre Thursday, with my position in TYP. This is now a good time for me to be in cash on the sideline.   The GMI and GMI-R are both back to one.   The only indicator that is still positive is my weekly indicator of the QQQQ.   The QQQQ remains in a Stage 2 up-trend (see weekly chart of QQQQ), as defined by Stan Weinstein (see his book to right).   So, in my trading account I am short and mainly in cash.   In my university pension I remain fully invested in mutual funds.   I only transfer my pension funds to cash when the weekly trend enters a Stage 4.   By that time, the 30 week average will have curved down.   I have successfully avoided past major down-trends by getting out at the beginning of a Stage 4. Note that the QQQQ closed right on the 30 week average (red). As long as the 30 week average continues to rise, I will ride this up-trend in my pension account.

In spite of the short term down-trend in the QQQQ, I do not   think this is the time for me to begin to short stocks in my trading account.   This is because the Worden T2108 indicator, at 15%,   is already in an area where prior bottoms have occurred.   If this indicator, which declined from 64% last Friday, should hit single digits this week, I would be looking for a bottom.   I might even buy some QLD (ultra long QQQQ ETF), if that occurs. Every time I have said this, I get scared when the T2108 hits such a depressed level.   This time I will try to take advantage of a further drop into such an extreme level.   The T2108 touched 6% at the re-test of the bottom in   March, 2009, and 1% at the panic bottom in October, 2008.   These were extreme readings, however, not seen any other time in the past decade.   Friday was the third day of the new QQQQ short term down-trend.   I will be more certain of this new down-trend if it lasts for 5 days.   Once we pass that point, trends tend to last for a while.   Note that only 1% (1) of the Nasdaq 100 stocks closed with its MACD above its signal line, another sign of short term weakness. For the first time since February 4th, there were more new 52 week lows than highs (46 vs. 10) in my universe of 4,000 stocks.   This is not the time for me to be buying stocks at new highs.

I looked at the performance of the IBD 100 list published on Monday, 4/12/2010. Since these stocks closed on 4/9, only 17% have advanced through last Friday.   Put another way, during this period the QQQQ has declined 7.4%, while more than half of the IBD100 stocks declined 9.5% or more.   Growth stocks tend to go up more in up-trends and decline more in down-trends, as traders take profits. For example, since 4/9 to 4/26 when the QQQQ topped, 50% of this IBD100 list advanced 4.9% or more, while the QQQQ increased only 2.8%.   So I continue to concentrate my buying in IBD100 stocks, but only in QQQQ short term up-trends (within a longer term up-trend).

By the way, remember I ran my submarine scan on 4/29?   Well, since then, all nine of the stocks that came up have declined, as did all of the Nasdaq 100 stocks.   Three of the nine (33%), however,   are down 17% or more, during a time when the QQQQ declined by 9.6%, but only 5% of the Nasdaq 100 stocks declined 17% or more. So,at least that time, the submarine scan did select stocks with a greater likelihood of sinking more during this period.

Remember, one must trade with the trend in order to maximize the chances of success. Right now, the short term trend is down, and I will not go long.   (The longer term trend is still up (Stage 2), so I will keep my pension invested in mutual funds and continue to dollar coast average in with new contributions, until it looks like Stage 2 is over.)   I trade like a chicken, run from a down-trend, and conserve my capital to trade only when the odds are in my favor.

How I buy AAPL for 12% down without using margin!


I thought you might like to know a way to buy a stock for little money down using deep in-the-money call options.   I became aware of this option (pun intended!) by reading Lee Lowell’s wonderful book on ways to get rich from options. A call option provides someone the right (but not the obligation) to buy 100 shares of a stock at a particular price (strike price) for a period of time (until option expiration).   Most people gamble with call options and try to buy a cheap call that is far out-of-the-money.   For example, if one goes to yahoo finance and enters AAPL and then selects options, one can get a whole table of possible call and put options for AAPL.

Looking at this table of May options on Sunday evening, I see that I could buy an out-of-the-money call on AAPL with a strike price of   $270 for about $2.47 per share or $247 total for 100 shares (excluding commissions).   This call gives me the right to buy 100 shares of AAPL at $270 per share through May option expiration (3rd Friday of each month).   Since AAPL stock is trading at $247.40, this option is far out-of-the-money.   It would have no real value to anyone until AAPL is above $270 per share (strike price).   The reason people are willing to buy the option for $2.47 per share is that they hope (and are betting) that AAPL will be above $270 by option expiration.   The money they are paying for what is currently a worthless option is   called time premium. In fact, this option buyer would have no profit at expiration unless the stock is selling at $270 + $2.47 (price paid for option) = $272.47   This is gambling.   But remember, if AAPL closes at, say $280 per share by option expiration, the option that was bought for $2.47 per share would now be selling around $10 per share, a quadrupling of the initial investment!   This is because one could execute the option and buy the 100 shares at $270 per share and then turn around and sell them immediately in the market for $280 per share.   One does not need to buy the shares, however, to reap the profit.   Before the option expires, one could just sell the option in the option market for around $10 per share ($1,000 total) in this example.

But an unusual characteristic of options is that as the option is deeper in-the-money, the time premium becomes very small and a small rise in the stock can make the option profitable to a buyer.   For example, the May call option with a strike price of $220 is offered at $29.40 per share, or $2940 for 100 shares.   This means that I could pay $2940 to control $24,700 worth of AAPL through May expiration.   Since AAPL is trading at $247.40, the May $220 call already has real (intrinsic value) value of $27.40 per share ($247.40-220.00).   Since the option would cost me $29.40 per share, the stock only needs to rise $2.00 to $249.40 before I begin to make money as AAPL rises.   Thus, for an investment of $2940 I get to reap the benefit of the gains in a $24,700 stock.   This equals about a 12% down payment, without the need to go on margin and pay interest!

What is the down-side?   Since I pay $2940 for the option, if AAPL closes below the strike price of $220, the option would expire worthless (why would someone buy the right to buy a stock at $220 if at expiration the stock   is   trading below $220?)   So, one can lose the entire investment if the stock falls a lot.   But this strategy loses less money than if one had paid full price for 100 shares   and then seen it fall far below $220!   The most one can lose is what they paid for the option. The big temptation to be avoided here is using the leverage to buy options on more shares than one could have bought outright. That is the way to make a huge bet and lose a lot of money.   I use this option strategy to buy the right to purchase about the same number of shares I would   have been able to purchase.

If you like this strategy, I suggest you read Lowell’s chapter on this topic.   Also, read up on how to open an options account and trade options. By the way, I would not even consider buying AAPL call options until after the earnings come out this week.   Look what happened to other high fliers last week, after they reported great earnings.

Now, the GMI and GMI-R are still at their maximum values.   However, the action in ISRG and GOOG led me to sell out some positions on Friday.   I think it is a warning sign when the leaders crack like that.   Remember, as trend followers, we only tend to exit the market after the trend has changed.   Thus far, the markets remain in an up-trend.   However, I am moving my stops up and am ready to get defensive. Friday was the 4oth day of the current QQQQ short term up-trend.   The last time the QQQQ closed below its 10 day average was February 23rd! That moving average is now at 49.17, only .36 below the current value of QQQQ.   It would not take much of a decline in QQQQ   to break below this important moving average. Note that the Worden T2108 Indicator is now below 80% and may be getting ready to decline.   Be careful out there.   Things probably can’t get much better.

Short term down-trend deepens; QQQQ Guppy chart ominous; In cash


I started teaching two classes on technical analysis last week and will explain more of my concepts and include informational links, as many students will be new readers.   My General Market Index (GMI) keeps me trading with the general market’s trend.   The GMI is a count of 6 short and long term indicators.     Because I like to trade growth stocks, the GMI focuses largely on the NASDAQ 100 stocks, as measured by the ETF, QQQQ.   The Successful New High Index measures whether stocks that hit a new high 10 days ago have risen since that time.   Since I trade stocks at or near new highs, I also like there to be at least 100 new highs in my stock universe of roughly 4,000 actively traded stocks above $5. My daily QQQQ and SPY indicators measure these indexes’ short term trends. The weekly QQQQ indicator is my measure of the longer term trend.   Weekly charts provide me with a more interpretable and reliable picture of the market’s trend.   Finally, my IBD Mutual Fund Index indicator tells me how well growth funds tracked by IBD are doing.   If   funds that invest in growth stocks   are doing well, I am also more likely to make money trading growth stocks. I subsequently added four more   indicators to   the GMI in the form of the GMI-R (revised). The added indicators count whether there are more   daily new highs than lows, and how the QQQQ has performed in relation to three moving averages.   I become very defensive in my trading portfolio when the GMI is less than 4 and consider going to cash.   When the GMI goes to zero, I also start going to cash in my more conservative university pension account, which allows me to trade its contents only a few times each year.   So, with the GMI currently at 1,

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